Chop Shop Indicator for Options Traders

2021년 11월 27일

As always, this is not financial advice and use at your own risk. Trading is risky and can cost you significant sums of money if you are not careful. Make sure you always have a proper entry and exit plan that includes defining your risk before you enter a trade.

This is for all of you options traders out there who choose to write options and collect premium. Since we seem to be a neglected bunch when it comes to indicators, I figured I would write a script that helps identify when underlyings are in a range and a good time to sell some premium when we are waiting for the next directional setup. This is the choppiness index modified to include a 21-period exponential moving average as a trigger, which I am calling the Chop Shop. The choppiness index , at its most basic, takes a log-scaled version of the summed Average True Range (ATR --- a volatility measurement) and converts it into an oscillator. The higher the oscillator value, the higher level of "chop" the stock is experiencing. This is often referred to as the stock is trading in a range. Most traders are advised to stay out of range trading because it is difficult. However, for an options trader this is an opportune time to collect some premium using bracketed short strike trades such as strangles, straddles, iron condors, or iron butterflies that are profitable when the stock stays rangebound and realizes a drop in volatility .

The indicator is extremely basic. You should look to collect premium and write these types of bracketed trades when Chop Shop crosses over its 21-period EMA . You should look to avoid writing bracketed trades when the Chop Shop trades below its 21-period EMA as this is when a stock is seeing a strong directional movement and can be considered trending. These are usually times when you want to get out of the way of the runaway train and make sure you are on the correct side of the trade or you can quickly get smoked. Use a combination of other indicators to help assist you define the most likely continued direction of the trend and you can then write directional premium trades such as credit spreads, directional Iron Condors, and butterflies to capture this and avoid stepping in front of that moving train.

2022년 8월 4일

릴리즈 노트

Renamed indicator to follow my "Trading Made Easy" series of indicators. As requested by another user, I have updated the code to allow the Trigger line to be changed to any value >= 1. The default is 21 periods as per the original description due to 21 days being the average trading month and when choppiness exceeds that level, the chances of sideways price action increases dramatically.